Environmental Economics

Geckos are to blame

Ever wonder were fat tails come from? Look no further. William Safire traces the source of the "fat tail" craze. Looks like we can blame the financial mess and much of our worries about climate change on geckos.

And I thought black swans were scary.

At least greed is still good, semantically speaking:

Newly risk-averse tycoons can rest assured that no semantic connection exists between the cheerful fat-tailed day gecko on our TV screens and the gimlet-eyed, greed-is-good financial villain named Gordon Gekko, played by Michael Douglas in Oliver Stone’s 1987 film, “Wall Street.”

Rob Stavins joins the fray

Harvard's Rob Stavins joins the blogging world, and he gets right down to business:

The only politically feasible approach that can make a real dent in the problem is a comprehensive, upstream cap-and-trade system to reduce carbon dioxide emissions 50 to 80 percent below 1990 levels by 2050. The declining cap will increase the cost of polluting, thereby discouraging the use of the most carbon-intensive fossil fuels and providing powerful incentives for energy conservation and technology innovation.

[...]

The bottom line is that getting serious about global climate change will not be cheap and it will not be easy. Beware of claims to the contrary. In the midst of a significant economic downturn, with businesses closing and unemployment on the rise, it makes sense for the new Administration to give its greatest attention to economic recovery. There is nothing wrong with sequencing policies. But if current predictions about the consequences of another few decades of inaction are correct, this defining moment provides an important opportunity for serious and sensible action.

The middle's worth a read too. Welcome, Rob!

Climate policy does wonders for your green-tech patent count

Innovation is the holy grail of climate policy. Without it, we are toast -- quite literally. Climate economists' efforts to quantify innovation, though, has more closely resembled something of a Monty Python goose chase than a deliberate pursuit. That elusive quest may have finally come to an end. A new study shows that Annex I countries that ratified Kyoto have had greater green tech innovation in the years after Kyoto than those that didn't ratify.

Two figures in the paper tell you pretty much all you need to know. The first, Figure 2, shows that the trend rate of patent filings appears to have risen for climate-related technologies relative to all technologies in recent years. The second, Figure 3, shows the divergence in the same period between Annex I countries that ratified Kyoto and the United States and Australia (yes, Australia ratified too, but much later).

Obama on recovery, green jobs and renewable energy

Obama on energy and economic recovery:

That starts with new, clean sources of energy. We know that the possibilities here are limitless. Here in Ohio and across America, we’ve seen old factories become new clean energy producers. We’ve seen entrepreneurs turning solar energy into electricity, and corn and soybeans into bio-fuels. Our scientists and engineers are hard at work developing cars that use less gas, homes and appliances that require less energy, schools and offices that are greener and more efficient than ever before.

But we also know that we are nowhere near realizing the full potential of their work. Take the example of wind power alone: I’m told that if we don’t act now, because of the economic downturn, half of the wind projects planned for 2009 could wind up being abandoned. Think about that. Think about all the businesses that wouldn’t come to be, all the jobs that wouldn’t be created, all the clean energy we wouldn’t produce.

And think of what’s happening in countries like Spain, Germany and Japan, where they’re making real investments in renewable energy. They’re surging ahead of us, poised to take the lead in these new industries.

This isn’t because they’re smarter than us, or work harder than us, or are more innovative than we are. It’s because their governments have harnessed their people’s hard work and ingenuity with bold investments — investments that are paying off in good, high-wage jobs — jobs they won’t lose to other countries.

There is no reason we can’t do the same thing right here in America. That’s why, as part of our Recovery and Reinvestment plan, we’re committing to double the production of renewable energy in the next three years, and to modernize more than 75% of federal buildings and improve the energy efficiency of two million American homes.

In the process, we’ll put nearly half a million people to work building wind turbines and solar panels; constructing fuel-efficient cars and buildings; and developing the new energy technologies that will lead to new jobs, more savings, and a cleaner, safer planet in the bargain.

Here at Cardinal Fastener, that could mean going from operating at 50 percent capacity to 90 percent capacity and creating even more good, made-in-America jobs right here in Ohio.

Now, given the magnitude of the challenges we face, none of this will come easy. Recovery won’t happen overnight, and it’s likely that, even with these measures, things will get worse before they get better….

But if anyone doubts that we can dig ourselves out of this hole, I invite them to come here to Ohio and look what you’ve done at Cardinal Fastener. I know it hasn’t been easy — and it hasn’t been without risk. But you’ve set your sights on the future, and you haven’t looked back. In an economy that’s losing jobs, you’re creating them. And they’re the kind of jobs that don’t just support families and sustain communities — but also help transform our economy, spurring growth not just today, but for decades to come.

That’s what we’ve always done in moments like this. We’ve looked ahead to the next big idea, that next new breakthrough. We’ve experimented and innovated, and when we’ve failed, we’ve picked ourselves up and tried again. And I know that if we can summon that determination and that great American spirit once again, we will meet the challenges of our time and build a better future for our children.

To quote CP, finally, a President who gets it.

Cap v FTax

The Financial Times' lead editorial today argues for prices over command-and-control (duh!) and then goes on to say a tax would be better than a cap (d'oh!). Where to begin?

Well, first, let me once again point anyone interested to an ongoing debate over at The Bulletin of the Atomic Scientists on this issue. There are arguments pro and con. I strongly believe the pro-cap arguments have the upper hand, but then again, I'm helping write them.

Second, I'm guilty as charged. I wrote for the FT editorial board in 2007. Let's just say that there may have been an editorial printed during that time that threw its weight behind a tax. That's only to say that there are indeed some good arguments on both sides.

In the vacuum of economic theory-land the two are, under certain conditions, even equivalent. In practice, they are clearly not. Here's the main part of a letter I just sent to the FT:

Most significantly, the US and EU cannot solve this problem alone. At the very least, the largest emerging economy emitters need to limit their pollution as well. A carbon market can make these commitments in the economic self-interest of all parties involved; a tax cannot.

Second, smart market design -- including provisions for banking and borrowing of allowances -- would dampen feared price volatility, and well-known market instruments can iron out the rest.

Third, the most important missing link in turning climate change from a problem into an unprecedented market opportunity is innovation. A cap taxes entrepreneurs to look for breakthrough technologies at any price. A tax caps innovation.

Lastly, almost all new scientific evidence over the past two years has shown that the climate problem is worse than previously feared. We do not have time to experiment with tax rates to achieve the desired results. If you want to limit emissions, do exactly that: cap them.

This, of course, is the staccato version. There's much more over at The Bulletin.

The road to Copenhagen runs through Washington, and Beijing, and Delhi, and Brasilia

Ban Ki-Moon comments on the importance of global climate action in the current edition of Newsweek:

This [current] impasse is a prescription for disaster. To break it means accepting two realities. First: the world is waiting for the United States to lea d, and rightly so. The United States remains among the world's most vibrant, entrepreneurial economies. Thanks in part to rising fuel prices, U.S. capital has flooded into "green" energy ventures in recent years. Slowing growth may affect this trend, but won't reverse it. And the new U.S. administration will have climate change high on its agenda.

The second reality is no less obvious: there can be no progress unless the newly developed nations also play a key role. China has surpassed the United States as the largest greenhouse-gas emitter. India will likely soon become the third-largest emitter. Fortunately, many of these nations have already begun moving to combat climate change. China has set national goals for reducing energy use by 2010. It has become one of the world's largest producers of wind power, and it leads in the development of solar energy. Brazil has already built one of the world's cleanest economies, with more than 80 percent of its electricity coming from hydropower, and has become a pioneer in biofuels and hybrid transportation. Meanwhile, Mexico has put more than 1.5 million people to work better managing its forests as a crucial buffer against future climate shocks.

True, the most advanced developing nations have not yet fully shouldered their responsibilities. Yet neither have developed nations. Both things must change before it is too late. Facing this great collective challenge, world leaders cannot wait for others to move. We must act together with the same urgency shown in the financial crisis.

Looking forward to Copenhagen, we should remember the proverbial truth that many roads lead to Rome. Some experts advocate strict emissions limits. Others favor voluntary targets. Still others debate the pros and cons of "cap and trade" carbon markets versus taxes and national conservation regulation. In truth, there is no one solution to climate change. We need all of the above. The important thing is to act, and to act now. When it comes to climate change, it's make-or-break time.

My best post of 2008

I left a comment on a green jobs post the day after pagan celebration of a Christian holy day:

That is why economics is known as the dismal science. We strange economists are most adept at recognizing the opportunity costs of various decisions. No one else really seems to care if opportunity costs offset some, or all, of the benefits of a good idea.

Opportunity cost is a strange notion to some (especially intro micro students) ... it is the value of the next best alternative whenever a choice is made. For example, if I purchase a $1000 flat panel LCD TV, the true cost of the TV is not $1000, but what I could purchase instead (such as $500 in each kid's college education 529 plan [sorry kids]).

In the case of green energy subsidies, if you are an economist then you must at least wonder if this is the best way to spend the money. There are benefits of pushing down the costs of green energy (e.g., improved air quality), and there are opportunity costs. Ignoring the opportunity costs is likely to lead to wasteful spending. Considering the opportunity costs is likely to lead to better social decision making -- regardless of whether the benefits of the subsidies exceed the costs.

The notion of opportunity cost, its recognition and the inevitable result that not all great sounding ideas are really great ideas, is the most important thing that economists bring to many policy discussions. Pointing out the unpleasantantries of opportunity cost is one of the purposes of this blog. The dismal part of the dismal science can not be avoided.

Passive houses, active policies

The most-emailed NYT article for two days running has not been another explanation of the shaky housing market (that's #2), but rather a front-page story on solidly built "passive houses":

Using ultrathick insulation and complex doors and windows, the architect engineers a home encased in an airtight shell, so that barely any heat escapes and barely any cold seeps in. That means a passive house can be warmed not only by the sun, but also by the heat from appliances and even from occupants’ bodies. [emphasis added]

It's staggering how much energy can be saved this way:

Even on the coldest nights ...[the] new “passive house” and others of this design get all the heat and hot water they need from the amount of energy that would be needed to run a hair dryer.

And best of all,

passive houses cost only about 5 to 7 percent more to build than conventional houses.

The article doesn't say, but it shouldn't take long to recuperate that kind of investment with lower energy bills.

Unfortunately, that price comparison holds for Germany, where virtually every home has thick walls and double or triple-glazed windows, rather than having cheap wooden boards wrapped in Tyvek -- aka FedEx envelopes -- for some "insulation."

Of course, prices are coming down everywhere, once you start building to scale:

In Germany the added construction costs of passive houses are modest and, because of their growing popularity and an ever larger array of attractive off-the-shelf components, are shrinking. [emphasis added]

So how do you get builders to construct these homes? Providing the right incentives -- aka a price on carbon -- and the right information is one way:

There are now an estimated 15,000 passive houses around the world, the vast majority built in the past few years in German-speaking countries or Scandinavia.

Energy standards and building codes is another option, although they come with risks as well:

when California inspectors were examining the Berkeley home to determine whether it met “green” building codes (it did), he could not get credit for the heat exchanger, a device that is still uncommon in the United States. [emphasis added]

Standards and codes clearly need to be nimble to replicate the kind of explosive growth seen in central and northern Europe. In the end, the right policy will likely need to be a mix of all of the above: get the prices right (a cap on carbon), set the right standards and codes (nimble and all), and spread the word (front-page NYT articles aren't a bad start).

Lastly, of course, there's the question of demand:

[T]hose who want passive-house mansions may be disappointed. ... Most passive houses allow about 500 square feet per person, a comfortable though not expansive living space. ... "Anyone who feels they need that much space to live...well, that’s a different discussion."

Priuses are hot -- or cool, depending whom you ask. Let's hope passive houses aren't too well-tempered to achieve that kind of cult status.

Messrs. Laffer and Pigou, hand-in-hand

Tim's latest post chronicles Tom Friedman's entry into the gas tax column watch: Win, Win, Win, Win, Win .... Today's New York Times also features another, perhaps slightly more surprising, op-ed:

Supply-side godfather Arthur Laffer is throwing his hat into the gas tax debate. Much like with his very own Laffer-curve, he comes down on the wronge side of the argument (he prefers a gas tax to an actual cap on emissions), but it shows just how far along we are that even someone like Mr. Laffer would turn into a proud member of the Pigou Club:

We need to impose a tax on the thing we want less of (carbon dioxide) and reduce taxes on the things we want more of (income and jobs). A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.

It's no longer a question of if to cut greenhouse gas pollution and provide incentives for the right behavior. The debate now squarely centers on how to do it.

Obama rears his head at climate summit

President-elect Obama shows his support for Governor Schwarzenegger's bi-partisan governors climate summit:

Among the notable quotables:

My presidency will mark a new chapter in America’s leadership on climate change that will strengthen our security and create millions of new jobs in the process.

That will start with a federal cap and trade system. We will establish strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them an additional 80% by 2050.

To quote James Surowiecki, "remind me again why this guy has to wait two months to become President."